Second marriages typically involve spouses who are older and have children from the first marriage. Consequently, the financial implications of the new marriage should be thoroughly explored, discussed and addressed prior to the new marriage.
Spouses should have a frank discussion about how to handle their assets, debts, income and investments. Do they want to live together but have two separate financial lives or do they want to have joint accounts? This question may be the most important of all to answer.
Once the new marriage begins, all income received and assets purchased during the marriage are presumed marital property, which means the new spouse now has an equitable share in funds that the other spouse may have thought stayed separate – anything from stock dividends to retirement income to Social Security payments could suddenly become half of what that spouse anticipated in terms of ownership. Taking these formerly separate funds and using them for marital expenses only further muddies the waters and gives the appearance that the spouses intended separate property to become marital property.
Why does this matter?
First, it immediately depletes a spouse’s marital estate. For example, if spouse A has three children from a former marriage and $500,000 in retirement assets, spouse A probably would think that in the event of death the children retain their full claim to these assets. But that is only partially true. While the children would still have their claim by will, the value of the claim will diminish by the marital share of the retirement assets. If during the marriage the original investment increases by $200,000, half that gain would go to the current spouse and not the children.
Second, it may blur how a spouse had planned to be financially secure in case of illness. Should a spouse become unable to work and also ill, the fixed income that spouse intended for such an event could be partially claimed by the new spouse. In the event of divorce, this could be catastrophic.
Third, the mixing of assets could have severe tax consequences depending upon how each spouse had previously planned for retirement. For instance, certain retirement accounts are tax free when dispensed, while others count as income. And some funds will implicate capital gains taxes as well. For a spouse who may have planned for a fixed income retirement, to suddenly have a tax liability could be a bit of a shock.
So, as you can see, many issues of significant import arise with second marriages. The spouses can protect their interests and assure their wishes in the event of illness or death will be carried out by doing two things – execute a prenuptial agreement and update all estate planning documents.
The prenuptial agreement will set out the expectations of the parties as to separate and marital property, issues with illness and conservatorship, and what happens in the event of divorce. The updated estate planning will make sure that wills and trusts reflect the intent of the parties and protect those interests as set out in the prenuptial agreement. Absent these two actions, a spouse will remain unprotected in terms of controlling his or her assets prior to entering the new marriage.
If you have questions about protecting your assets before a second marriage, contact us – we can help.